23-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by...

23-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan

Chapter 23

Accounting for superannuation plans


Learning objectives

• Understand what a superannuation plan is

• Know the difference between a defined benefit superannuation plan and a defined contribution superannuation plan

• Understand how accrued benefits are calculated for a defined benefit superannuation plan

• Understand how accrued benefits are calculated for a defined contribution superannuation plan


Learning objectives (cont.)

• Understand what financial reports must be prepared for a defined benefit superannuation plan, and what financial reports must be prepared for a defined contribution superannuation plan

• Understand how assets must be measured, and how revenue is determined for a superannuation plan pursuant to AAS 25

• Be aware of the disclosure requirements contained within AAS 25


AASB 119 ‘Employee Benefits’

Addresses employee benefit obligations from the employer’s perspective—not from the perspective of the superannuation fund


AAS 25

• AAS 25 ‘Financial Reporting by Superannuation Plans’– contains recognition and disclosure requirements for

superannuation plans– the AASB is currently undertaking a comprehensive review of

the accounting requirements for superannuation plans and a new standard is expected in the near future.

– among the reasons for the review are some inconsistencies between AAS 25 and the requirements embodied in AASB 119.

– as an interim measure, the AASB made some minor amendments to AAS 25, which was re-released in May 2006


Introduction to accounting for superannuation plans

• Superannuation plan– an arrangement between trustees and employers,

employees or self-employed persons that benefits will be provided upon the retirement (or other specified events) of plan members

• Members require information about:– individual claims against the fund; and

– the ability of the fund to pay the claim when it is due

• Superannuation plans control significant sums of money and play a significant role in Australian financial markets


Introduction to accounting for superannuation plans (cont.)

• Funds managed through trusts

• Funds paid by employers and/or employees into the trust fund

• Role of trustees– to administer the fund in the interests of all members

and in accordance with fund’s rules and government laws



• Fund administrators– are appointed by trustees

– administer the day-to-day running of the fund, arrange insurance cover and advise on fund’s operations

• Australian Prudential Regulation Authority (APRA)– monitors and regulates operations of superannuation

funds (also banks, insurance companies, etc.)



• Contributory plan– employees contribute periodic payments into the trust

fund

• Non-contributory plan– all contributions made by employer



• Types of reports provided by superannuation plans are those relating to– individual contributions and entitlements of each

member

– the performance and financial position of the plan itself



• AAS 25 ‘Financial Reporting by Superannuation Plans’– no disclosure requirements about individual members’

entitlements

– no statutory backing, but APRA encourages compliance

– prescribes accounting and disclosure policies for superannuation plans deemed to be reporting entities



• Only funds deemed to be reporting entities need follow AAS 25

• Funds that might not be deemed to be reporting entities are– single-member plans

– plans where plan members are employed by entities other than public companies, and the plan members and the owners of the employer entity are identical groups


Classification of superannuation plans

• Defined benefit plan – amounts to be paid to members at normal retirement

age are specified or determined, at least in part, by members’ years of membership and/or salary levels

• Defined contribution plan– amounts to be paid at normal retirement age are

determined by accumulated contributions made by and/or on behalf of members, and investment earnings


Measurement rules• Assets (AAS 25)

– may include contributions receivable, plan investments, cash and other assets

• All assets are to be measured at net market values as at reporting date (AAS 25)– net market value is defined in AAS 25 as ‘the amount which

could be expected to be received from the disposal of an asset in an orderly market after deducting costs expected to be incurred in realising the proceeds of such a disposal’

– presents difficulties for assets that are thinly traded and/or of a highly specialised nature

• Justification for net market value (AAS 25)– it provides more relevant information to users about resources

available to pay benefits than does the cost basis


Measurement rules (cont.)

• Revenue (AAS 25)– may include investment revenue (e.g. interest,

dividends, property rentals)

– may include contributions from employers and employees

– changes net market value of plan assets

• Refer to Worked Example 23.1 (p. 800)

• The asset revaluation and depreciation requirements of AASB 116 do not apply to superannuation plans


No gain on sale to be recognised

• No gain on sale will be recognised in relation to the sale of plant and equipment of a superannuation plan. This is consistent with paragraph 48 of AAS 25, which states

The requirement to include changes in net market values of assets realised during the reporting period means that a gain or loss on the disposal of non-current assets will not result<em>in concept, assets will be revalued to net market value immediately prior to their disposal, changes in net market value will be included in revenue and no gain or loss on disposal will result.



• Inclusion in revenue of changes in net market values of investments introduces potential for earnings volatility

• Accrued benefits– represent an obligation to the members of the

superannuation plan (i.e. a liability)

• For a defined contribution plan (AAS 25)– is the difference between carrying amounts of assets

and the sum of income tax liabilities and sundry liabilities (i.e. a residual)



• For a defined benefit plan (AAS 25)– measured from a comprehensive actuarial review to

determine present value of expected future benefit payments

– actuarial review requires assumptions about future salary levels, mortality rates, membership turnover, etc.

– measurement at least every three years

– determining appropriate discount rate is not an easy exercise and depends largely on professional judgment

– if rate based on the anticipated rate of return on an organisation’s assets cannot be determined then rate on government bonds may be used


Financial reporting for defined benefit superannuation plans

• If a detailed actuarial review of members’ entitlements at balance date is undertaken, the plan can prepare either (AAS 25)– statement of net assets;

– statement of changes in net assets; and

– notes;

OR

– balance sheet;

– operating statement;

– statement of cash flows; and

– notes


Financial reporting for defined benefit superannuation plans (cont.)

• If a detailed actuarial review is not undertaken, the plan must prepare (AAS 25)– statement of net assets;

– statement of changes in net assets; and

– notes



Financial reporting for defined contribution superannuation plans

• Plans must prepare (AAS 25)– balance sheet;

– operating statement;

– statement of cash flows; and

– notes



Disclosure requirements

Disclosures required for defined contribution plans (AAS 25)– A balance sheet

separate description of investments and other assets by class

separate disclosure of liability for accrued benefits and other liabilities by class

amount of accrued benefits allocated to members’ accounts and amount not yet allocated


Disclosure requirements (cont.)

• Defined contribution plan disclosure requirements (AAS 25) (cont.) – An operating statement

separate disclosure of investment revenue, amounts contributed by employers, amounts contributed by members and other revenue

– A statement of cash flows to be produced in accordance with AAS 28 separate disclosure of amount paid to members

– Also applies to some defined benefits plans



• Defined benefit plans (not measuring accrued benefits at year end) (AAS 25)– a statement of net assets

separate disclosure of assets, liabilities and net assets available to pay benefits

note disclosure of liability for accrued benefits and date at which liability was measured

– a statement of changes in net assets



• Defined benefit plans (not measuring accrued benefits at year end) (AAS 25) (cont.)– a copy or summary of most recent actuarial report:

effective date of report names and qualifications of actuary relationship of market value of net assets to aggregate

vested benefits opinion of actuary as to plan’s financial condition


Summary

• The chapter considers issues associated with accounting for superannuation plans

• Plans can be either defined benefit (DBP) or defined contribution plans (DCP)

• DCPs must provide a balance sheet, operating statement and statement of cash flows

• DBPs have an option relating to the reports they provide

• Superannuation plan assets are to be measured at net market values at reporting date

• Measurement of accrued benefits differs between DCPs and DBPs

23-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by...

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